[INTERVIEW] 'Growth slowdown can accelerate depletion of retirement pension fund'

Hong Sok-chul, a Seoul National University economics professor who also heads a division concerning people's livelihood at National Economic Advisory Council, a presidential advisory body, speaks during an interview with The Korea Times at his office in Seoul last month. Korea Times photo by Choi Won-suk

Professor says pension premium rate should be raised to OECD average of 18.2%

By Yi Whan-woo

A slowdown in economic growth is feared to result in a drop in personal incomes, and accordingly, can accelerate the depletion of state-run retirement pensions in the face of low birth rates and an aging population, a pension expert warned.

During a recent interview with The Korea Times, Seoul National University economics professor Hong Sok-chul said the serious nature of a foreseeable drain in pension makes the Yoon Suk Yeol administration's pension reform of 2023 more "crucial than ever."

For every five years since 2003, the National Pension Service (NPS), the state-run pension operator, has newly estimated the scale of the fund in the long term and revised related schemes. This year marks the fifth revision.

"The future of Korea's retirement pension system amid rapid demographic change can become more uncertain as the country's economy is growing at a slower pace and individuals are likely to have less money to pay for the pension," said Hong, who also heads a division concerning people's livelihood at the National Economic Advisory Council, a presidential advisory body.

His comments came as Asia's fourth-largest economy is widely forecast to display rare low growth in the 1-percent range this year, while the estimated year of depletion for the NPS fund has been brought forward by two years to 2055.

The fund was worth nearly 920 trillion won ($737.17 billion) as of last year.

And during its revision in January, the NPS announced that the fund is expected to reach its peak at 1,755 trillion won in 2040 and start posting a shortfall in 2041 before it completely runs out in 2055.

The NPS' forecast this year compares with its previous outlook in 2018 when it projected the fund to peak at 1,778 trillion won in 2041, marking a deficit beginning in 2042 and depletion in 2057.

"Under the circumstances, a need for pension reform is becoming more urgent as the years pass and such reform is extremely crucial under the Yoon government," Hong said.

"I reckon the public will positively respond to this year's reform plan as it now matters more to their retirement life," he added.

The reform plan will require endorsement from the National Assembly.

Given the serious nature of the NPS fund, the government advanced its schedule from October and seeks to submit the plan to the National Assembly within the first half.

The NPS fund was introduced in 1988 and was designed in accordance with Korea's then-average life span of 70 years.

The fund underwent two reforms ― in 1998 during the administration of President Kim Dae-jung and in 2007 during the administration of Roh Moo-hyun. It has changed little since then.

The premium rate was increased to the current 9 percent from 3 percent while the average income replacement rate, which sets the amount of receivable pensions after retirement, was reduced to 40 percent from 70 percent.

The minimum age of pension payout will be raised to 65 by 2033, up from the current 62 this year and 60 in 1988.

Critics say reform should mainly focus on readjusting the premium rate, average income replacement rate and minimum age of pension payout, by taking into account an increased life expectancy of 83.5 as of 2022.

The hike in life span comes as the old-age dependency ratio, or the number of people aged 65 or more per 100 people of working age, rises from 24.6 in 2022 to an estimated 100.6 in 2070. It is also at a time when less than one baby is born per woman, which is the lowest birth rate in the world.

The professor said he agrees with the critics' suggested idea that pension subscribers should "pay more and receive later" while the average income replacement rate remains unchanged.

"Such an idea makes sense, as reducing the average income replacement rate and having subscribers receive less pension when they retire is not feasible," he said.

He noted that Korea especially has a higher poverty rate for senior citizens compared to the majority of OECD countries and that many of them rely on retirement pension to live.

He suggested that the premium rate should be gradually raised to the OECD average of 18.2 percent, as compared to 15 percent suggested by government sources recently.

For the minimum pensionable age, he said it can be postponed to 68 years old.

Asked whether his suggestion can be acceptable, Hong said convincing younger subscribers will be essential as they will be affected more heavily than older generations.

He said the government-level discussion on delaying the retirement age from the current 60 will also be needed because citizens would then work longer and earn wages instead of solely relying solely on the pension.

"The pension reform therefore will concern the overhaul of labor productivity as well," Hong explained.

He viewed revising the NPS fund scheme with flexibility rather than doing so every five years should also be considered via the government's reform efforts.

Such flexible operation of the public retirement pension is witnessed in Germany, Japan and Sweden. There the pension amount and starting age vary depending on changes in the number of subscribers, life expectancy, birth rate and other related factors.

The professor viewed a more efficient investment and greater return using the NPS fund should be prioritized as another way to delay the depletion of the fund.

Data from National Assembly Budget Office showed the NPS posted 10.86 percent in its return on investment in 2021. The office assessed the NPS as faring well but said its return rate is still low compared to that of the public pension operators in advanced economies.

For instance, California Public Employees' Retirement System of the United States marked 13.28 percent, while Canada Pension Plan Investments (CPPIB) posted 13.66 percent. The Government Pension Investment Fund of Japan saw its 2021 return on investment at 12.62 percent. Norway's Government Pension Fund Global (GPFG) was at 14.51 percent and ABP of the Netherlands at 11.19 percent.